It may be a more than a few years away for us, but an Emirati friend and I were comparing retirement plans at the weekend.
Whiling away our golden years at an exotic island somewhere would be nice, we agreed. Spending more time with family and friends would also be good.
Then we both considered how long it would be before we would actually be able to retire.
My friend told me he would have worked for 30 years before he saw anything of his pension.
Then, at the age of 55, he would be able to retire on an annual income equivalent to about 80 per cent of his final salary. For Emiratis, the official retirement age is 60 but they can retire at 55 as long as they have completed at least 20 years of work.
I told him he was fortunate. From a global perspective, his arrangement sounded fairly agreeable.
Most 55-year-olds elsewhere in the world – including expatriates in the UAE - will likely still have another decade of work to go before finally putting their feet up. In Japan and South Korea, average retirement isn’t until the age of 70.
Even then the pension pot of the average retiree elsewhere is likely to be woefully meagre. In the UK, workers can expect their income to drop by more than a third when they reach retirement, according to recent research by the financial firm Partnership. For seniors in the US, the median household income is US$35,107, around 57 per cent of the income of their younger counterparts aged 45 to 64, estimates Interest.com, a financial information website.
The stark contrast in the retirement outlook between Emiratis and everyone else is perhaps no surprise. In Europe, decades of generous state welfare for citizens are slowly unwinding under pressure from ageing populations and governments seeking to cut huge budget deficits. In the US, the government at some point will face a similar task if it is to get to grips with slashing a $680 billion deficit.
The UAE faces no such headache. It ran a fiscal surplus of about 9 per cent its GDP last year and is expected to post another surplus again this year. Sitting on more than 8 per cent of global oil supplies affords the government the financial cushion to look after its citizens.
Ensuring Emiratis can retire on a comfortable income is one of the cornerstones of the country’s social support system that also extends to subsidised housing, electricity and water costs.
Still, the Government is mindful of wanting to ensure the sustainability of all such spending. The Fiscal Coordination Council, a government body, has been working with the IMF to ensure the riches from the country’s oil receipts are spread across future generations. As a result, the federal government has cut back spending in the past two years.
The risk of bloated welfare spending is clear from Kuwait, which provides its citizens with some of the most generous benefits in the GCC. Sheikh Jaber Al Mubarak Al Sabah, the prime minister, warned last month that the “welfare state” Kuwaitis are used to “cannot continue”. The IMF said last year that spending levels in the country would outpace revenues from oil by 2017.
The heavy cost burden of Emirati pensions is one of the many reasons the Government is keen to shift more citizens to private sector employment.
In the private sector, Emiratis enjoy the same level of pension as those in the public sector. But the government’s contribution drops significantly.
For public sector employees, the worker contributes 5 per cent of their salary each month to their future pension pot. The Government then stumps up a further 15 per cent.
Private sector workers contribute the same 5 per cent each month but the government’s outlay drops to 2.5 per cent. Instead, the remaining 12.5 per cent comes from the employer.
But at the moment only about 10 per cent of Emiratis are working within the private sector. Increasing that percentage will help to slash the government’s wage costs but also its pension bill.
For that to happen the UAE will have to get to grips with breaking down barriers to nationals joining the private sector including low wages and long hours. Alternatively, the Government could consider incentives or penalties to drive companies towards recruiting locals.
That way, the pensions of future generations of Emiratis will be guaranteed long after my friend has retired to an exotic island somewhere.
tarnold@thenational.ae
